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macroeconomics

Steel tariffs will allow American steelworkers to keep their jobs, help the American domestic economy, reduce United States’ dependency on China as a trading partner and foster the growth of the middle class.

This was the logic that motivated Donald Trump to impose a 25 percent tariff on steel and 10 percent tariff on aluminum on all countries except Mexico and Canada on March 23, 2018. This decision, while politically popular among his supporters who advocate for the steel industry, is incorrect in its assumptions and harmful to America as a whole. History and economic theory demonstrates that these tariffs will be bad for the economy in the short and long term.

Historically, tariffs have adversely affected the United States economy. The Smoot-Hawley Tariff, enacted in 1930, was arguably the largest in American history. This piece of legislation levied taxes on over 20,000 goods. According to Robert Whaples of the Economic History Association, there is a consensus among economists that the Smoot-Hawley Tariff exacerbated the effects of the Great Depression.

Other tariffs have had similar effects on the economy. More recently, President George W. Bush implemented steel tariffs on March 5th, 2002. These ranged from 8 percent to 30 percent and were implemented in response to the collapse of many steel-producing companies. The United States’ International Trade Commission estimates that these tariffs created a loss of around 41 million dollars to the U.S. economy. In addition, thousands of steelworkers lost their jobs. The tariffs reduced the amount of steel into the United States economy, inevitably creating a 9.2 percent steel price increase. As a result, around 200,000 jobs in all steel-consuming industries were lost in 2002 according to a Lancaster University study by Robert Read. Since steel-producing industries only account for 190,000 jobs, the net result on employment of this policy was incredibly negative. Because of the negative effects of this action, the Bush administration decided to revoke these tariffs on December 4th, 2003. Simply reducing the imports does not improve domestic conditions. Successful domestic firms are not competing against international firms; therefore, they will not be efficient enough to export their goods to other countries. Furthermore, American citizens will be less likely to purchase these goods for higher prices. This creates market conditions that aren’t conducive for success in the long term. Even if tariffs are imposed on just one product like steel, the negative effects will extend to a variety of industries.

Still, roughly 70 percent of Republicans and 25 percent of Democrats support President Trump’s decision to implement steel tariffs. These numbers are a result of the belief that tariffs can help expand the ever-decreasing American middle class. However, the fact that technology is advancing at such a rapid pace and automation is becoming more popular leads to a lower demand for labor in manufacturing jobs. As capital becomes more efficient, fewer workers will be necessary. In 1950, the number of steelworkers in the United States was around 650,000. Today, this number has fallen to 140,000. This number will continue to decrease as technology improves. Tariffs will not stop the inevitable jobs loss in the steel and aluminum industries. Instead, they will decrease jobs in other industries. A strong, concentrated political interest in favor of the steel tariffs currently outweighs the weak, diffuse interest in opposition to the steel tariffs. Because steelworkers benefit greatly from these tariffs, they will have a large incentive to passionately support President Trump’s policy. On the other hand, the greater number of people who would be harmed by the implementation of steel tariffs do not believe their jobs are in jeopardy. Therefore, there will be significant passion and political support behind the steel tariffs, even though they harm America as a whole.

The recent steel tariffs had immediate negative effects on the U.S. economy. The day the steel tariffs were put in place, the S&P 500 dropped from around 2,750 points to around 2,590 points. While there is limited data on the effect on employment and GDP, we can use history and economic theory to predict the full effect of these tariffs.

Steel and aluminum are present in everything from cables to cars. Accordingly, steel tariffs raise prices on items that hard-working Americans need in their daily lives. Joseph Amaturo from the Buckingham Research Group estimates that these tariffs will raise the price of cars by 300 dollars per vehicle. The actual effect of this is to lower the income of the rest of America at the expense of just steelworkers. This will reduce the amount of money that people have to spend and invest to grow other segments of the economy.

Additionally, raising tariffs could cause harmful economic effects if other countries choose to retaliate. In fact, the United States has already suspended the tariff on the European Union, Australia, South Korea, Brazil, and Argentina, some of the biggest exporters of steel into the American economy. The result of putting this tariff into effect only in certain countries will only benefit the countries which have been exempted from this tariff.

Furthermore, the fact that some of the biggest exporters of steel are exempted shows that this tariff does not even serve its intended purpose. The exempt countries will still export enough steel into the American economy to drive American steelworkers out of their jobs at a similar rate. This tariff only strains relations with countries who aren’t exempted, while effectively maintaining the quantity of steel imported.

Just like President Bush did in 2003, President Trump should recognize that his decision to put in place steel and aluminum tariffs is damaging to the United States as a whole. However, that does not seem to be the case right now. While some steelworkers may lose their jobs consistent with global demand and technology changes, more Americans will be able to keep jobs in related industries and the average American will be more able to afford everyday goods without the tariff. Because people are able to save more money, they will choose to invest more of that money. This will have the effect of creating jobs in other industries that are competitive in the global economy, like technology, rather than attempting to sustain unsustainable jobs. The American economy would be more prosperous, vibrant, and efficient without these tariffs.

On March 1st, 2018 President Donald Trump signed two proclamations imposing a 25 percent tariff on steel and a 10 percent tariff on aluminum that have become subject to much public debate. “I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminum,” he said, finally fulfilling one of his campaign promises to aid the American steel industry.

This is not the first time that the domestic steel industry has received protection through tariffs and trade regulations. In 2002, President George W. Bush imposed similar tariffs on imported steel, a controversial decision met by public outcry from those who advocated for free trade. The economic impact of these trade policies does not bode well for the future of the Trump economy. Despite their intentions, studies show that Bush’s trade policies were largely detrimental to the national economy, suggesting a similar path for Trump’s tariffs.

Despite the administration’s support for free trade, the Bush administration justified the steel tariffs in 2002 as a necessary measure to protect against dumping practices. After the International Trade Commission, a U.S. agency, concluded that the European Union (EU) had been flooding and endangering the American steel industry, Bush swiftly authorized plans to impose tariffs on EU and East Asian steel. Bush hiked the tariff on foreign steel up to 30 percent, which had previously ranged from zero to one percent.

Politics also influenced Bush’s decision to impose tariffs. According to a study on the consequences of the 2002 tariffs, one of Bush’s primary campaign promises was to protect the steel industry, gaining him much support from steel-producing swing states like Pennsylvania, Ohio, and West Virginia. Fulfilling these promises became paramount for the Bush administration who sought reelection in just a few years. The culmination of economic and political factors resulted in tariffs that were swiftly announced and imposed in March.

The economic retaliation by the EU was detrimental to the American manufacturing industry and economy as a whole. Within months of the tariff, the World Trade Organization had deemed Bush’s tariffs to be illegal, permitting the EU to set $1 to $4 billion worth of its own tariffs and sanctions in response. This sparked an international trade war leading to major steel shortages within America, which according to Trade Partnership Worldwide, increased steel prices up to 38 percent within eight months. These volatile price hikes had collateral effects on the manufacturing industry: automobile and appliance companies now faced rising production costs along with shortages on steel. Companies across most American industries now needed to cut down on costs and did so largely at the expense of their workers. By March of 2002, every state within America had experienced job loss from higher steel prices, leading to a roughly $4 billion decrease in wages. “We found there were 10 times as many people in steel-using industries as there were in steel-producing industries,” said Tennessee Senator Lamar Alexander. “They lost more jobs than exist in the steel industry.”

The culmination of economic and political pressures eventually pushed Bush to reverse the sanctions just over a year after they were imposed. Having targeted various American exports, the EU began targeting specific industries that would directly hurt Bush’s hopes for his 2004 reelection. For example, the EU threatened to place high tariffs on oranges from Florida and cars produced in Michigan, an attempt to inflict significant damage on Bush’s campaign for reelection. By late 2003, Bush finally lifted the tariffs.

The motivations behind the economic sanctions that Trump has signed are eerily similar to those of Bush. Both presidents have justified their tariffs by declaring a clear opposition, the EU for Bush and China for Trump. Similar political key words such as “safeguard” or “protection” have been used to support these tariffs. A significant portion of Trump’s supporters come from these steel-heavy states like Pennsylvania, one of the major swing states that Trump won. Very similar political and economic factors appear to have pushed both presidents to support tariffs on the steel industry.

There are also several parallels between the economic details and circumstances of Trump and Bush’s overall plans. Trump has signed off on imposing a 25 percent tariff on all steel imports, a number just shy of the 30 percent tariff that Bush had implemented. The steel industry has remained a declining sector in the American economy since 2002. A recent study by the Organization for Economic Co-operation and Development, or OECD, described the global steel industry as “weaker than it has been in years” and that most governmental policies have failed to promote short to medium-term sustainability. Though China has now emerged as the key player for steel exports rather than the EU, the overall macroeconomic conditions of the industry itself have not changed significantly.

Advocates of Trump’s sanctions have argued that several differences between the two plans make the Trump’s tariffs more likely to succeed. Both sides of the political spectrum have noted the vagueness of Trump’s executive order, particularly to which countries the tariffs will apply. The current executive order exempts “friendly nations” from the sanctions without much clarification which countries would fall under such category. Supporters of these sanctions view this vagueness as a way of insuring greater flexibility and leniency. By having these loopholes and potential exemptions, Trump can pick and choose which countries fall under the “friendly” category. It should also be noted that Bush’s tariffs, though stringent in the beginning, ultimately succumbed to pressures for exemptions once the EU retaliated. Today, China has openly stated that they still expect these sanctions to apply to their steel industries. China has also been vocal about potential retaliation.

The Bush administration’s steel tariffs have been largely condemned by both Democrats and Republicans since their end in 2003. The economic retaliation and subsequent effects on the manufacturing industry have all pointed towards the necessity and benefits of free trade. Trump’s tariff plan appears to have many economic and political similarities to the Bush tariffs, suggesting a similar fate will befall the American economy within the coming years.

The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank (MDB) that aims to support the building of infrastructure in the Asia-Pacific region, has quickly filled a vacuum left by traditional MDBs that have become bloated and inefficient. Since the 2008 financial crash, traditional multilateral development banks have neglected their duties to guide and fund developing nations. Given the ineptitude of the administration-heavy MDBs and the failure of the banks to account for every developing region, AIBB has been forced to find innovative solutions to typical MBD problems, such as “often slow and overly bureaucratic ways of the traditional lenders and their slow pace of representational and operational reform,” according Gregory Chin in an article about the AIIB.
For most MDBs, board structures revolve around a host country. In the case of the International Monetary Fund (IMF) and the World Bank, the board structures center around the United States, which developing nations to adapt a similar board configuration. In contrast, the AIIB does not revolve around a host country, allowing the bank a more flexible transition between countries, directly tailored to their needs. This fluidity is innovative in that it allows other nations to take initiative and adapt the AIIB to future scenarios, preventing one nation from controlling a dominating share of the bank.
There are critics who reject the structure of the AIIB. Currently, China has a 28.7 percent voting share in the AIIB, which suggests the country may use its influence in the AIIB to push its political ideologies and shut down dissenters. However, to assuage these fears of a dominant national influence, Chinese officials in Beijing offered to forgo veto power and reduce their own voting shares to less than one-quarter (if the United States or Japan agreed to join). While neither country joined the AIIB by the opening deadline, President Jin Liqun was quick to assert China will forgo its veto ability anyway to reassert the AIIB’s objective of creating a bank that is “inclusive and transparent” with a focus on the “achievement of common development.”
Perhaps the most polarizing feature of the AIDD is that it “functions on a non-resident basis,” according to Gregory Chin, a professor of political science at New York University. In general, the role of a resident board is to act as another layer of control over management. The AIIB has no need to follow this antiquated practice, as resident boards in various MDBs act as a political check on every decision taken, which confuses the line between board and management. By streamlining the resident board, which accounts for between 3 percent and 7 percent of operating budget in conventional banks, the AIIB can allocate greater funding to other operations. In the World Bank, for example, the resident board costs about $70 million annually, creating an environment in which “resident boards often slow down decision-making, sometimes unnecessarily…having nonresident boards may help to streamline decision-making processes,” according to David Dollar of the Brookings Institution.
In terms of significance to developing member nations of the AIIB, the innovative capital structure of the AIIB is the most tangible difference between the AIIB and other traditional MDBs. The AIIB’s initial capital base of $100 billion indicates it is a medium-size MDB. In comparison to the Asian Development Bank’s (ADB) capital base of about $160 billion and the World Bank’s $223 billion, the AIIB’s capital base seems insufficient and lacking. However, the AIIB spans the gap between capital bases through its capital structure set up. For reference, shareholders pay MDBs through either paid-in capital or callable capital. Paid-in capital is the payment of the capital to the MDB from the onset, while callable capital is compromised of the funds that shareholders agree to provide when necessary. Callable capital acts as an I.O.U. where the promised number of funds is only given up when needed for a project. Paid-in capital is the preferred form of contribution to MDBs as it speeds up the loan process and distribution of capital for projects.
Most MDBs have approximately a 5 percent paid-in capital fund, limiting the bank’s efficiency and speed on development projects. In contrast, the AIIB’s larger 20 percent paid-in capital fund exponentially raises their efficiency, allowing the AIIB to ramp up lending quickly. To give context, the ADB has an immediately available fund of $8 billion, the World Bank has $11.2 billion and the AIB holds a paid-in capital fund of $20 billion. This gap only increases every year with nearly 30 nations waiting to join the AIIB while the World Bank’s and ADB’s growth has stagnated. In projects where time is of the essence, AIIB’s innovative capital structure allows them to be efficient in lending and project developments, whereas other MDBs would delay payments and projects until all the necessary capital has been acquired from the callable capitals of shareholders.
Some critics argue that this structure only allows China to funnel money into its allies even more efficiently. However, based on the AIIB’s recent projects in India, whose industrial rise directly threatens China’s economic dominance, this is not the case. In the bank’s first two years of operation, half of all proposed projects are in India, ranging from highways to power plants. In addition, there are multiple projects in indirect rival countries, such as NATO ally Turkey and NATO partner Georgia.
In response to growing concerns of China’s historical struggles with sustainability, AIIB officials were quick to assert that the AIIB will be “lean, clean, and green.” To this end, the AIIB has published the “Environmental and Social Framework (ESF),” which it invited environmental organization to review and improve. In addition, the AIIB reassured shareholders that its operations would satisfy the latest international agreements on sustainable development, such as the 2015 Paris Agreement on Climate Change and the United Nations 2030 Agenda for Sustainable Development.
A key defining factor of the AIIB is the types of projects it takes on. Since the 2008-2009 financial crash, MDBs have refused to fund large infrastructure in developing nations, preferring risk-averse loans in stable countries. Even by the 1980s, MDBs had started shifting their focus away from large infrastructure projects and towards the development of less capital-intensive investments, like legal and political ministries. Under the overwhelming support of developing nations, the AIIB will focus on “big-ticket investments” such as power plants, highways and railways, which will greatly improve the quality of life for citizens. This investment strategy puts the power of the bank into the hands of the member nations, where the benefits will be reaped by millions of citizens.
While the AIIB has multiple innovative features that are not seen in existing MDBs, its most important aspect is giving a voice to previously underserved developing nations. Although still a relatively young bank, the AIIB represents a new golden standard that can be summarized by its modus operandi: “lean, clean and green: lean with a small efficient management team and highly skilled staff; clean, an ethical organization with zero tolerance for corruption; and green, an institution built on respect for the environment.”